WASHINGTON — In a landmark decision that could redefine legal and financial strategies in U.S. bankruptcy courts, the Supreme Court has ruled against the use of non-consensual third-party releases for resolving mass tort claims, except in cases involving asbestos. This pivotal ruling ends a long-standing practice widely accepted by bankruptcy courts and removes a key tool that companies like Purdue Pharma have used to shield stakeholders such as directors or shareholders from related lawsuits when the company itself files for bankruptcy.
For more than four decades, bankruptcy courts have employed non-debtor releases to facilitate broad settlements and streamline the resolution of large-scale litigation, providing a pathway for companies to clear significant legal liabilities without every involved party needing to file for bankruptcy protection. These legal maneuvers have been particularly useful in complex Chapter 11 cases, allowing a company that’s restructuring to pull itself free from the weight of massive claims by consolidating them and addressing them through structured settlements approved within the bankruptcy process.
However, the Supreme Court’s decision in the case concerning Purdue Pharma, the maker of OxyContin, represents a shift in judicial perspective on the extent of bankruptcy courts’ authority under the U.S. Bankruptcy Code. Purdue Pharma’s bankruptcy plan, which aimed to resolve thousands of opioid crisis-related lawsuits, involved a proposal where the Sackler family would contribute billions to the company in exchange for legal immunity. The court’s narrow majority found that the Bankruptcy Code does not grant authority for such non-consensual third-party releases, thereby restricting the ability of bankruptcy plans to absolve stakeholders not directly filing for bankruptcy from related liabilities.
The ruling has profound implications for U.S. bankruptcy law, potentially complicating how companies manage large-scale and complex liabilities in reorganization plans. Prior to this decision, it was generally possible for third-party releases to be included in a restructuring plan with sufficient creditor support and judicial oversight, as long as certain legal standards were met. Under the new Supreme Court directive, however, such releases are significantly limited, potentially leading to lengthier and more contentious bankruptcy cases.
The decision does not entirely close the door on third-party releases, though. The Supreme ledft open several questions, including whether consensual third-party releases are permissible and what constitutes “consent” in such cases. This ambiguity suggests that future litigation and strategic bankruptcies may focus increasingly on negotiating these consensual agreements.
The potential ramifications extend beyond U.S. borders too, with the decision likely influencing how multinational companies approach restructuring, especially in industries like pharmaceuticals where litigation risks can span multiple jurisdictions. Non-U.S. insolvency regimes, which often include more lenient standards for third-party releases, may see a shift in where companies choose to initiate restructuring proceedings.
Financially, the ruling also casts doubt on the efficacy of prior settlements that included third-party releases. Stakeholders who previously relied on bankruptcy procedures to mitigate litigation risks might find themselves exposed to renewed legal challenges, a development that could deter future settlements or restructurings that resemble the Purdue Pharma case.
Moreover, the decision may prompt legislative changes. Congress has the authority to amend the Bankruptcy Code in response to judicial interpretations, as it did with asbestos-related claims. Whether lawmakers will extend similar provisions to other types of claims remains uncertain. Meanwhile, companies navigating Chapter 11 may have to rethink their strategies, focusing perhaps more on direct negotiations and consensual settlements than on legal protections previously assumed to be available through bankruptcy court.
In the wake of the Supreme Court’s ruling, the landscape of corporate bankruptcy in the United States stands on the cusp of significant change, with new legal battles and legislative debates almost certainly on the horizon. As courts, companies, and creditors adjust to these new rules, the ripple effects could reshape not just the process of bankruptcy, but the very strategies companies use to confront their most daunting financial and legal challenges.